{"id":18621,"date":"2020-06-09T09:30:53","date_gmt":"2020-06-09T13:30:53","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/how-defensive-strategies-played-out-for-cn-rail-pension-atrf-as-markets-crashed-146711"},"modified":"2020-06-09T09:30:53","modified_gmt":"2020-06-09T13:30:53","slug":"how-defensive-strategies-played-out-for-cn-rail-pension-atrf-as-markets-crashed","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2020\/06\/09\/how-defensive-strategies-played-out-for-cn-rail-pension-atrf-as-markets-crashed\/","title":{"rendered":"How defensive strategies played out for CN Rail pension, ATRF as markets crashed"},"content":{"rendered":"
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Martha Porado<\/span> | June 9, 2020 <\/p>\n

When the coronavirus pushed equity markets off a cliff, Canadian defined benefit pension plans had to mobilize to address a number of concerns.<\/p>\n

The Canadian National Railway Co. pension recently shifted towards a more defensive investment strategy, said Marlene Puffer, president and chief executive officer for the CN investment division of the company, at a webinar hosted by the Association of Canadian Pension Management last week.<\/p>\n

As a highly mature plan, with about $18 billion under management, it pays out around $1 billion each year, she noted. \u201cBeing a corporate plan that\u2019s federally regulated, solvency matters. So we were well positioned for this kind of situation. Obviously, we didn\u2019t predict the pandemic, but we were concerned about equity valuations. And we were concerned about interest rates falling further, so we shifted our asset mix to have additional interest rate hedging in place. And we also had in place a sophisticated downside protection program related to the equity markets . . . and shock absorbers within almost every asset class that we have. And with that, we came through this period quite strongly.\u201d<\/p>\n

Read: Where can pension funds find returns in a low interest rate environment?<\/a><\/strong><\/p>\n

After making it through a dramatically difficult couple of quarters, the CN Rail plan\u2019s return for the year is still in the green, added Puffer. \u201cIt seems strange to be talking to my members and saying, \u2018I\u2019m delivering a modest, positive number and I\u2019m very excited about that.\u2019 But that\u2019s exactly where we are.\u201d<\/p>\n

Prior to the pandemic, she noted, the plan addressed its traditional home-bias in its equity portfolio and switched to using an all-country world index as its benchmark portfolio. \u201cAt the time, we really thoughtfully did that with the thought that, should there be any form of crisis in the global economy, it would be a defensive play relative to our previous positioning.\u201d<\/p>\n

Unhedged U.S.-dollar exposure also boosted the plan\u2019s returns through the crisis as the U.S. dollar appreciated, boosting equity returns in local currency terms here in Canada.<\/p>\n

In addition, as the crisis roiled through markets, the plan had sufficient liquidity to take on some rebalancing efforts, said Puffer. \u201cThe good news is that means, as equities were falling, we were actually buying and as equities would recover, we would sell a bit at these sorts of mini peaks. So that activity over the past couple of months has added value to our fund.\u201d<\/p>\n

Read: Half of institutional investors concerned about fixed income liquidity: survey<\/a><\/strong><\/p>\n

In order to perform this strategy, the plan had to manage its liquidity concerns very carefully, she added, noting that, while the fund has made rigorous use of derivatives as a method of liquidity management for some time, other factors came into play. \u201cIt was important though that, for example, our government of Canada portfolio was almost unencumbered coming into the crisis and was our source of extra liquidity through the repo market. And the Bank of Canada stepped in as well to offer pension plans direct access. That was important as a second backstop to give us additional reassurance that, should we need some additional liquidity, it was easy to access.\u201d<\/p>\n

Liquidity was notably less of a concern for a less mature plan like the Alberta Teachers\u2019 Retirement Fund, said Derek Brodersen, its chief investment officer, also speaking during the webinar. While the ATRF is about the same size as the CN Rail plan, it still has net cash inflow of about $300 million a year. \u201cThat\u2019s really helpful in a stressful market because we actually don\u2019t need to sell anything to pay pensions because we\u2019re actually collecting more money in contributions than we need to pay every month.\u201d<\/p>\n

Nevertheless, he said, aspects of the portfolio required careful managing in terms of maintaining adequate liquidity. \u201cWe have a lot of unhedged exposure to foreign markets. Our public equity portfolios and our private equity portfolio is entirely unhedged, but some of our private market asset classes, we\u2019ve hedged those back to Canadian dollars by policy. As the Canadian dollar fell, we needed liquidity to fund some of those currency hedges.<\/p>\n

\u201cWe spent a lot of time thinking about that and how we could ensure we had available liquidity without having to impact our asset mix in any meaningful way \u2014 without having to sell something we didn\u2019t want to sell. And I think we managed to do that pretty effectively. We tapped the repo market when it was still available and made sure we had lots of liquidity.\u201d<\/p>\n

Read: IMCO focusing on liquidity, cost-efficiency amid coronavirus crisis<\/a><\/strong><\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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